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Geithner pledges forceful attack on banking crisis

(AP) - Treasury Secretary Timothy Geithner said
Tuesday the new administration will wage an aggressive two-front
battle against the worst financial crisis in seven decades, while
the Federal Reserve is expanding a key lending program to up to $1
trillion.

But investors appeared wary of the government's latest plans.

The Dow Jones industrial average plunged about 275 points in early
afternoon trading as financial stocks led the market lower,
reflecting Wall Street's growing concerns about the government's
ability to revive the banking industry.

The efforts were part of the government's major overhaul of the
widely criticized financial rescue program.

The Fed said it would expand the size of a key lending program
to as much as $1 trillion from $200 billion. The program, which has
yet to begin operations, is designed to boost resources for
consumer credit and small business loans.

“We have to jump-start job creation and private investment, and we must get credit flowing again to businesses and families.”

Treasury Secretary Timothy Geithner

The Fed said the program would be expanded to cover the troubled
commercial real estate market and certain residential mortgages.

"Right now critical parts of our financial system are
damaged," Geithner said. "Instead of catalyzing recovery, the
financial system is working against recovery and that's the
dangerous dynamic we need to change."

Geithner said the loss of 3 million jobs last year, and another
600,000 just last month underscored the urgency for government
action.

"It is essential for every American to understand that the
battle for economic recovery must be fought on two fronts,"
Geithner said in a speech in Treasury's ornate Cash Room where he
unveiled the administration's new plan.

"We have to both jump-start job creation and private investment,
and we must get credit flowing again to businesses and families," he said.

Geithner pledged to "fundamentally reshape" the bailout
program with the effort guided by the lessons of financial crises
throughout history.

The administration's new plan will greatly expand an effort to
unclog credit markets that provide loans to consumers and
businesses. This effort will see a fivefold increase in bailout
funding to $100 billion.

If a total of $100 billion from the bailout fund were used, it
would be enough to support an additional $1 trillion in lending
support through the Fed's program, known as the Term Asset-Backed
Securities Loan Facility, the administration said.

The administration also unveiled a program to create a
partnership between the government and the private sector to get
private investors to buy bad assets that are currently weighing
down banks' balance sheets.

Geithner said the program initially
will aim to support the purchase of $500 billion in bad assets, but
could ultimately support up to $1 trillion in purchases.

Geithner said he realized the size of the financial rescue
represented a sizable commitment, but noted that many of the
amounts were loans and loan guarantees, which means the government
eventually will be repaid.

Still, the country should know that the program will involve
costs to the government and risks, but he said the alternative of
doing nothing would be far riskier.

"As costly as this effort may be, we know that the complete
collapse of our financial system would be incalculable for
families, for businesses, and for our nation," Geithner said.

Congressional aides said the administration was looking at
possibly providing guarantees to investors who purchase the toxic
assets or using the Fed's resources to lower their borrowing costs.

With just those two programs, Geithner outlined efforts that
could total $2 trillion. However, the public-private partnership to
sop up bad assets will depend heavily on how much interest the
private sector has in participating in the program. Details of that
effort were still being worked out.

And the projected $1 trillion partnership with the Fed to unclog
the markets supporting credit card debt, as well as auto, student
and small business loans also will depend on the interest that
private investors show in participating in a program the Fed has
been working since November to launch.

Geithner said the administration's efforts to deal with the
financial crisis would supplement the $800 billion-plus economic
stimulus program the administration is pushing Congress to pass.

The new administration's bailout overhaul sought to address
widespread criticism in how the Bush administration ran the $700
billion program Congress passed in October.

Lawmakers in both
parties charged that banks were getting billions of dollars in
taxpayer support with few strings attached, and that all the
government aid was failing to accomplish its primary objective of
getting banks to resume more normal lending.

Under the overhaul, the Obama administration seeks to deal with
those issues by more closely monitoring banks to make sure the
money they receive is being used to increase lending.

The biggest banks participating in the program also will have to
undergo a "stress test" of their balance sheets to ensure they
are in sound enough condition to receive additional government
support, Geithner said.

President Barack Obama, speaking at a prime-time news conference
Monday night, said his overhaul of the financial rescue program
would bring "transparency and oversight" to the heavily
criticized program.

He said the overhaul would correct previous mistakes such as a
"lack of consistency" and what he said was the failure to require
banks to show "some restraint" in terms of executive compensation
and spending in such areas as corporate jets.

The first $350 billion in the bailout program was committed by
the Bush administration under the direction of former Treasury
Secretary Henry Paulson.

In part because of the political outrage
over how the program has been run, the Obama administration decided
against seeking any additional money beyond the $350 billion left
to be spent as part of its initial overhaul.

Many economists believe that $700 billion will not be enough to
get the financial system operating normally and that the
administration will eventually have to ask for billions more. The
administration, however, decided to try to increase the power of
the program by using smaller amounts of bailout money to harness
bigger resources available at the Fed and in the private sector.

Asked about the possibility that his administration will
ultimately need more money, Obama said Monday the goal now is to
"get this right" because it was important to restore financial
market confidence so banks will resume more normal lending.

The major elements of the bailout effort include:

-Continued government purchases of stock in banks as a way to
bolster banks' balance sheets. The new stock purchases will come
with tighter oversight to make sure banks are using the government
support to increase lending. The new requirements will not apply to
banks that have already received support.

-Provision of at least $50 billion of the remaining $350 billion
rescue fund to bolster government efforts to help homeowners deal
with rising foreclosures in the current steep housing slump.
Details on the housing measures were postponed for an announcement
expected to occur in the next two weeks.